Credit raters put pressure on Deutsche Bank over new strategy

FRANKFURT (Reuters) - Deutsche Bank’s new chief executive Christian Sewing needs to come up with a convincing strategy swiftly to stave off the threat of costly credit downgrades, the leading rating agencies told Reuters.

FILE PHOTO: The headquarters of the Deutsche Bank is pictured in Frankfurt, Germany, March 19, 2018. REUTERS/Ralph Orlowski/File Photo

Standard & Poor’s is expected to say by the end of the month whether it will cut the rating of Germany’s largest lender after putting it on “credit watch” in April.

Chances of a downgrade are “at least 50 percent”, Giles Edwards, S&P’s lead ratings analyst on Deutsche Bank, said in an interview with Reuters.

S&P, like its counterparts Moody’s and Fitch, is awaiting details on Deutsche’s future strategy after the bank announced the outline of a revamp last month.

“We want to see that it’s not going to take a lot longer than previously thought to deliver, that it’s not going to be more expensive, and that it is credible,” S&P’s Edwards told Reuters. “Banks need their clients to be confident.”

Edwards and the other analysts interviewed for this article are the lead or primary analysts at their agencies for Deutsche Bank. Final decisions on ratings are made by committees of which they are a part.

S&P rates Deutsche Bank’s long-term credit at A-, on negative credit watch. That is one or two notches below most major European competitors. By comparison, S&P rates Switzerland’s UBS at A+ with a stable outlook.

Credit ratings are critical for any company but especially crucial for a bank such as Deutsche, whose perceived health is important in winning business.

Sewing, who has been with Deutsche for almost three decades, announced in late April that the bank would pare back the U.S. and Asia operations of its sprawling investment bank and refocus on Germany and Europe. He also said that Deutsche would invest in retail banking in its home market and in asset management.

The bank holds its annual general meeting on May 24 and is expected to provide more details on strategy by then.

The bank’s credit ratings have come under pressure in the weeks since it announced the promotion of retail banking specialist Sewing following a board meeting on the evening of Sunday April 8.

Three of four major ratings agencies have warned of a dimmer outlook for the bank, with DRBS being the latest last week.

HIGH STAKES

A lot is riding on the ratings calls for Deutsche, which like all financial institutions, is among big issuers of debt securities and highly reliant upon credit ratings.

Lower ratings can result in higher funding costs, which could further hamper Deutsche’s attempt to return to profitability after three consecutive years of losses.

The bank said earlier this year that it had fallen behind in its original 2018 cost cutting targets as revenue dwindles.

Deutsche has also been struggling to win back clients after speculation of a government bailout in 2016, and any vote of less confidence from ratings agencies could send anxious customers scurrying, analysts say.

Deutsche Bank declined to comment on its ratings but Dixit Joshi, the bank’s group treasurer, told fixed-income analysts this month that Deutsche was disappointed by the agencies’ stance.

“We don’t think our ratings accurately reflect the strength of our balance sheet and our low risk levels, but we will continue to work with the agencies to allay their concerns,” Joshi said.

Those concerns were heightened after the ousting of Chief Executive Officer John Cryan last month and the departure of several other senior executives.

Moody’s changed its outlook to negative on some of its ratings the day after Sewing announced changes at the investment bank amid “rising execution challenges at Deutsche Bank.”

Peter Nerby, lead analyst for Moody’s on Deutsche Bank, told Reuters in an interview that the agency normally resolves changes in outlook in 12 to 18 months.

Nerby is studying the timing and path toward his definition of an “idealized future state” for the bank, which he defines as 5.4 billion euros (4.7 billion pounds) in annual profit and 30 billion euros in revenue. Last year, the bank posted a loss of 735 million euros and generated 26 billion euros in revenue.

“If we conclude that goal is not achievable in any reasonable time frame, then the rating may be too high,” Nerby said.

Fitch is the only major agency to refrain so far from any formal change in rating or outlook, though it downgraded Deutsche Bank last September.

FILE PHOTO: John Cryan, at the time CEO of Germany's Deutsche Bank, and board member Christian Sewing attend the bank's annual news conference in Frankfurt, Germany, February 2, 2018. REUTERS/Ralph Orlowski/File Photo

Christian Scarafia, Fitch’s primary analyst on Deutsche, said in an interview that the September downgrade “spoke to what we’ve then seen developing in the fourth quarter last year and first quarter of this year.”

Last month, he warned that the bank’s turnaround “has been slow and insufficient” and that “quick results will be crucial”.

The weak start to 2018 “puts pressure on to implement the turnaround,” Scarafia said. “The sensitivities remain very clear.”